Question

Bad Wolf Enterprises is recalling and reissuing an outstanding bond offering. The reissued bond offering will be 10 year 5% coupon bonds. The present value of the coupons savings of the new offering is $588,365, the future value of the extra principal payment of the new offering is $350,000, and the administrative fees associated with the recall and reissue are $112,394. Calculate the net benefit ( ) or cost (-) of the call and reissue for Bad Wolf Enterprises

Answer 1

Bad Wolf Enterprises

The net benefit of the call and reissue for Bad Wolf Enterprises is:

= $261,071.

Step-by-step explanation:

Data and Calculations:

Bond maturity period = 10 years

Coupon rate = 5%

Present value factor at 5% for 10 years = 0.614

Present value of the coupons savings of the new offering = $588,365

Future value of the extra principal payment of the new offering = $350,000

Present value of the extra principal payment = $214,900 ($350,000 * 614)

Administrative fees associated with the recall and reissue = $112,394

Total cost = $327,294 ($214,900 + $112,394)

The net benefit of the call and reissue = Total benefits minus total costs

= $261,071 ($588,365 - $327,294)